Federal Reserve votes on regulatory relief bill implementation

On October 31, 2018, the Federal Reserve Board (Fed) released a set of proposed rules and invited public comment on a framework that would more closely match the regulations for large banking organizations with their risk profiles, and “significantly” lower regulatory barriers for smaller banks. The changes would ease compliance requirements for firms with less risk, while maintaining stringent requirements for those financial institutions with more risk.1 The proposed framework establishes four categories of standards for banking organizations with those having between $100 billion and $250 billion in assets obtaining the greatest relief.2 These rules build on the Fed’s current tailoring of its regulations, and are consistent with changes from the Economic Growth, Regulatory Reform, and Consumer Protection Act (EGRRCPA), passed by Congress in May, to roll back some of the Dodd-Frank regulations.3

What this means

The proposed Fed framework is responding to legislation which called on Federal agencies to ease compliance for non-Wall Street banks, and portions will be issued jointly with the Office of Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC).4 “The proposals before us would prescribe materially less stringent requirements on firms with less risk, while maintaining the most stringent requirements for firms that pose the greatest risks to the financial system and our economy,”5 Fed Chairman Jerome Powell said in a statement. “And the proposals seek to maintain a middle ground for those firms that are clearly in the middle.”6

Under the Fed’s proposed plan financial institutions would be divided into four categories, each with different risk profiles.7

The lowest category would include banks with between $100 billion and $250 billion in assets and “would be subject to significantly reduced requirements” including exclusion from annual stress tests, which would be changed to a two-year cycle. These proposals would reduce the amounts of “easy-to-sell” assets they need to keep on hand for any emergency situation.

Banks with $250 billion in assets or smaller firms with $100 billion in assets that “exceed certain risk thresholds” would be subject to “enhanced standards,” tailored to the complexity of their risk profiles. However, those that are not classified as systemically important would have significantly reduced liquidity requirements, in some cases as little as 70% of the current levels.

The third category will focus on “advanced approaches” banks or those with “global scale.” At present this category includes financial institutions with at least $250 billion in assets, or $10 billion in foreign exposure, and this threshold will be raised significantly to $700 billion in assets or $75 billion in international activity. They would continue to be subject to stringent prudential standards appropriate to very large and internationally active financial institutions.

The final category, the Globally Systemically Important Banks (GSIBs) would continue to be subject to the same highly stringent standards adopted after the financial crisis, and so would see no changes to their capital and liquidity requirements.

At present Foreign Banking Organizations (FBOs) are not included in these Fed proposals, although regulators have stated that they intend to follow up in the near future with new proposed regulations for those institutions.8 This has drawn criticism from some, including Marcus Stanley, policy director at Americans for Financial Reform, who stated that the possibility of relaxed rules for non-U.S. lenders, including some of the worlds’ largest banks is “quite concerning.”9 One Fed governor, Lael Brainard, an Obama appointee, voted against the proposal arguing that it went beyond the intent of Congress in the EGRRCPA and exposed the financial system to unnecessary risk.10

Conclusion

The new proposals come five months after Congress passed the EGRRCPA and directed the Fed to come up with new rules for banks above the $100 billion threshold. Randal Quarles, the Fed’s vice chairman for supervision, in testimony before the Senate Committee on Banking, Housing and Urban Affairs on October 2, 2018, stated that at this point in the aftermath of the financial crisis there is an opportunity to tailor supervision and the regulatory framework without damaging the resiliency of the financial system.11 He emphasized that the Fed, in implementing the EGRRCPA should “tailor regulation more broadly to take into account the business mix, complexity and interconnectedness, and risk profile of banking institutions.”12 Quarles defended the Fed’s proposals saying that banks with less than $250 billion in assets “for the most part do not exhibit meaningful levels of interconnectedness and complexity,” and so do not pose significant risks to the system. “The character of regulation should match the character of a firm,” Quarles added.13

On November 14, 2018, vice chairman Quarles is scheduled to present semiannual testimony to the U.S. House of Representatives Financial Services Committee, and the Fed’s comment period on the new proposals will be open until January 22, 2019.14

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